Week of 7 - 13 Nov 2022
In a Nutshell
In what has been a tumultuous year for macro assets, the previous week was calm and orderly, especially relative to developments in the crypto markets, where an explosion of volatility ripped through.
In the aftermath of 2 Nov’s FOMC, markets were spooked by an exceptionally hawkish tone of the Federal Reserve’s roadmap in handling inflation. There were, however, strong mixed signals in Powell’s press conference.
Taking a holistic view of economic data as well as the largely disappointing earnings season thus far, the market has drifted towards expecting a slow in pace of rate hikes, with 50bps so far being the consensus.
Whilst we are still some ways to go before the next FOMC, CPI numbers to be released tonight, 10 Nov 22 9:30pm SGT would be expected to vastly influence next FOMC’s decision.
CPI reading coming in hotter than expected could see a swift repricing back towards a 75bps consensus, while a softer than expected reading could spark off more risk-on sentiment and an overall lower volatility environment.
Months of low volatility and trading in rangebound environment came to an abrupt end starting on Sunday, where reports of Alameda and FTX’s weaknesses and troubles started to trickle in following a Coindesk’s article.
We provide a summary of the FTX and Alameda blow-up in the full report below, as well as its implications for the rest of the market –the likelihood of mass contagion, and near term risks and expectations.
This week, we saw one of the largest accelerations in vols in this entire year – with 1 week vols spiking from a sub 50 handle to a high of 150 vols in a matter of two days.
Next, we saw a mass scramble to long volatility, specifically downside protection, with the 25D skew swinging massively from slightly favouring calls last week to as high as 34 vols favouring puts at one point during the week. This has now eased to about 28 vols favouring puts.
In panic markets such as what we’ve last seen, idiosyncratic moves that we tend to see occasionally in ETH vs BTC tend to evaporate (remember the ETH2.0 merge?). In a mass panic and rush to safety – like what we saw this week, ETH returned to being a higher beta BTC play.
Macro
In what has been a tumultuous year for macro assets, the previous week was calm and orderly, especially relative to developments in the crypto markets (more on that in the Crypto section), where an explosion of volatility ripped through - barely half a year after the previous Celsius, 3AC debacle.
In the aftermath of 2 Nov’s FOMC, markets were spooked by an exceptionally hawkish tone of the Federal Reserve’s roadmap in handling inflation, even for Chairman Powell’s standards. There were, however, strong mixed signals in Powell’s press conference – suggesting that Powell was clearly trying to appease all parties by suggesting both that “There would be a time to slow rate increases and that time is coming and it may be the next meeting”, but also that it is “very premature to think about pausing rate hikes”.
Two vastly contradicting statements. Nevertheless, taking a holistic view of economic data as well as the largely disappointing earnings season thus far, the market has drifted towards expecting a slow in pace of rate hikes – Powell’s first statement.
Whilst we are still some ways to go before the next FOMC, CPI numbers to be released tonight, 10 Nov 22 9:30pm SGT would be expected to vastly influence next FOMC’s decision. CPI reading coming in hotter than expected could see a swift repricing back towards a 75bps consensus, while a softer than expected reading could spark off more risk-on sentiment and an overall lower volatility environment.
Fig 2. Target Rate Probabilities for 14 Dec 2022 Fed Meeting. Source: CME FedWatch
Crypto
Months of low volatility and trading in rangebound environment came to an abrupt end starting on Sunday, where reports of Alameda and FTX’s weaknesses and troubles started to trickle in following a Coindesk’s article - indicating that the bulk of the holdings of Alameda, Bankman-Fried's (SBF) hedge fund, were in FTT, seemingly with an overinflated market cap. The news started to gain traction on Twitter but well and truly exploded when Binance’s CEO, CZ, announced that Binance would be liquidating just over $580m of their own FTT holdings in light of the recent developments and allegations against FTX.
This caused a spiral in FTT prices, which in turn led to a cascading effect of Alameda’s loans being margin called, more news and silence from FTX fanned the fire and triggered a massive bank run on FTX, who were forced to pause withdraws after already processing more than $6b worth of withdrawals in a single day. Many users and institutional clients still maintained funds on FTX at this point – perhaps heeding SBF’s assurance that all funds on FTX were held untouched and in whole, not invested elsewhere. In retrospect this was clearly false.
The whipsaw did not end there, with Bankman-Fried then announcing that night that an agreement had been made with Binance and a Letter of Intent (LOI) was signed for Binance to fully purchase FTX and make investors whole – subject to a due diligence. With this news, markets temporary reversed across the board, only to “U”-turn sharply an hour later and print lower lows.
Despite the announcement from SBF, there were still many doubts in the air. What if the deal fell through? The deal only included a takeover of FTX, but made no mention of Alameda, which had borrowed funds from multiple other lenders using the now beleaguered FTT as collateral. Fears of yet another contagion like that of 3AC and Celsius set in.
This morning, Binance announced that they were pulling out of the FTX takeover. Interestingly, we observed that markets did not further sell-off after the announcement, suggesting that sell pressure might be quite exhausted at these levels. In fact, BTC and ETH are now trading higher than pre-announcement levels.
Looking ahead, more volatility could still be in the near horizon – especially if the contagion effect stemming from Alameda is larger than expected. Thus far, numerous market makers or lenders have revealed “small” exposures on FTX or to Alameda, but nothing to the extend of the 3AC contagion as yet. If this starts to develop negatively, expect more volatility and downside targets to emerge.
However, there are many reasons that this contagion is nowhere near as widespread and severe as 3AC and Celsius. As far as using FTT as collateral goes, Alameda was the only entity in the industry using that as collateral, and with the more exotic nature of the collateral, many entities have accounted for FTT holdings with 50% haircut – significantly more than the usual treatment of BTC and ETH collateral at 5-10%.
Before the entire Alameda blow-up, the crypto markets had already absorbed and washed away a large amount of leverage and bad actors – for the industry to grow organically and in a healthy and sustainable manner, it is important that badly run companies such as 3AC, Alameda etc are wiped out, paving the way for the stronger players and builders to continue with contributing positive developments.
Option Vols
This week, we saw one of the largest accelerations in vols in this entire year – with 1 week vols spiking from a sub 50 handle to a high of 150 vols in a matter of two days. Interestingly, even as FTX/Alameda fears started brewing on Sunday to Monday, the options market remained quite complacent and nonchalant about the news, only panicking on Tuesday after Binance’s announcement. Next, we saw a mass scramble to long volatility, specifically downside protection, with the 25D skew swinging massively from slightly favouring calls last week to as high as 34 vols favouring puts at one point during the week. This has now eased to about 28 vols favouring puts.
BTC
· 1w implied: 98.4 vol vs average of 55.2 vol last week
· 1m implied: 83.6 vol vs average of 57.0 vol last week
· 1w R/R: 28% favouring Puts vs average of -1% favouring calls last week
· 1m R/R: 24 % favouring Puts vs average of 5% favouring Puts last week
ETH
In panic markets such as what we’ve last seen, idiosyncratic moves that we tend to see occasionally in ETH vs BTC tend to evaporate (remember the ETH2.0 merge?). In a mass panic and rush to safety – like what we saw this week, ETH returned to being a higher beta BTC play. IVs spiked above 200 vols in the 1 week tenor briefly, with 25d skews approaching 40 vols simultaneously. This has new eased slightly back into the mid 150 vol handle.
· 1w implied: 152.3 vol vs average of 52.7 vol last week
· 1m implied: 116.5 vol, vs average of 65.4 vol last week
· 1w R/R: 26% favouring Puts vs average of 2% favouring Calls last week
· 1m R/R: 25% favouring Puts vs being flat last week.
Notable Option Flows:
BTC
1. 1000x 18-Nov-22 16000/13000 Put Spread bought
2. 1000x 18-Nov-22 19000 Call bought
3. 750x 30-Jun-23 24000 Call bought
ETH
1. 10000x 18-Nov-22 1100/800 Put Spread bought
2. 10000x 27-Jan-23 1800 / 31-Mar-23 1800 Call Calendar bought
3. 5000x 18-Nov-22 2000 Call bought
Technical Levels
BTC Levels
· R2 20,000 (Reclaim of Monthly Open )
· R1 17,500 (June 2022 Lows)
· Pivot 16,200 (Pivot Level, current low)
· S1 14,000 (2019 High)
· S2 12,500
ETH Levels
· R2 1,650
· R1 1,450
· Pivot 1,250 (Previous key breakout area)
· S1 1,000 (Key psychological level)
· S2 850 (June 2022 Lows)